Capitalism in Crisis

The head of one of the world’s largest corporations says it’s time to rebalance the economic system that has created great wealth.

Paul Polman is the Chief Executive Officer of the Anglo-Dutch company Unilever NV. It owns some of the world’s best-known brands – Becel, Vim, Lipton’s Tea, Dove, Hellman’s, etc.In an interview with The Globe and Mail (March 2013) he stresses that the father of capitalism, Adam Smith, believed it “was intended for the greater good. When our generation grew up after the Second World War, our parents wanted the same kind of thing; they wanted us to go to university and have a better life. Most of them were working for the greater good of society.”Now, Polman argues that capitalism began to lose its way in the 1980s when leaders in the United Kingdom, the United States, and other large economies started to follow the economic teaching of Milton Friedman.Friedman taught that capitalism worked best when it was free of government regulation. To him, profit and self-interest could solve all economic problems; unrestricted free markets would create a bonanza of wealth from which all people would benefit.He found enthusiastic converts to his theories in Britain’s Prime Minister Margaret Thatcher and U.S. President Ronald Reagan. An era of deregulation began, anchored firmly in the belief that the market was self-correcting; corporations would act responsibly because to do otherwise would threaten their long-term prosperity.Then came the financial crash of 2008.

Corporations Behaving Badly

Corporations were making huge money out of passing around dodgy financial packages and selling them investors as low-risk, high-return instruments. But, they were high-risk and known to be so by their vendors. Eventually, these investments turned sour, people lost their savings, financial institutions collapsed, and the Great Recession was triggered. That’s when, according to Paul Polman, smarter economists realized the way economic growth was being generated with “high levels of public and private debt and over-consumerism is not sustainable.”

He says the single-minded focus on short-term profit is a dangerous path for businesses to follow. It leads to cutting corners that lead to such things as the Bhopal disaster of 1984, the creative accounting at Enron of 2001, the BP oil disaster of 2010, or switching horsemeat into “beef” products in 2013.

Single-Minded Pursuit of Profit

Investors take their money to the place where they think they’ll get the highest return; their cash does not have a conscience.

So, executives and their performance become part of the problem. They are under tremendous pressure from hedge funds and other investors to continue producing ever-larger quarterly profits.

This takes many businesses into a cost-cutting mode where they skirt around safety measures, ignore environmental regulations, source material from the lowest-cost suppliers, and lay off employees.

Since the Great Recession many companies have downsized staffing levels and forced their remaining employees to accept insecure, temporary status. This has created a large pool of unemployed and underemployed labour, with the heaviest burden falling on the young.

Social Stability Threatened

Paul Polman says he is concerned about the effect economic hardship is going to have on social cohesion in countries such as Greece or Spain where youth unemployment has reached levels of 50 and 60 percent. A permanent, disgruntled underclass with almost nothing to lose is a menace that should not be ignored.

History Professor Jerry Z. Muller comments that these are the sort of conditions that “can erode social order and generate a populist backlash against the capitalist system at large.”

And, even the World Economic Forum sees trouble brewing if the status quo isn’t changed. The Swiss-based organization is ground zero for capitalism. Before its 2013 meeting it issued a report on threats to global financial and social stability. The consensus of the 1,000 experts polled was “The global risk that respondents rated most likely to manifest over the next 10 years is severe income disparity, while the risk rated as having the highest impact if it were to manifest is major systemic financial failure.”

Paul Polman says the solution is better corporate behaviour. He says that to be successful corporations have to be focused on the interests of society not solely on the interests of shareholders. He believes consumers will reward those companies that treat employees and suppliers ethically and those that respect the limits of the planet’s environment. Those that continue with business as usual, he says, will be punished.

Comments

I'd left England before the Iron Lady started her handiwork, but watched with sadness from Canada.

Shortly after Milton Friedman death, she was quoted by The Telegraph as saying, "He revived the economics of liberty when it had been all but forgotten...I shall greatly miss my old friend's lucid wisdom..."

My area was one of the first to experience the downside of Capitalism, as it was diverted through Thatcherism. This is a mining area, which suffered greatly under the Miners' Strike and the subsequent closure of the pits.

The intervening decades have not been pretty. The crash of 2008 hit really hard. I hate Capitalist principles for what it did to me and the other people around here.